Weekday musings on Practical Preparedness, Saving Money, Good Health, and Current Events.

Thursday, June 2, 2011

Is Progress Slowing Down?

“When Moses was alive, these pyramids were a thousand years old. Here began the history of architecture. Here people learned to measure time by a calendar, to plot the stars by astronomy and chart the earth by geometry. And here they developed that most awesome of all ideas - the idea of eternity.”

In his penetrating new book The Great Stagnation, economist Tyler Cowen ... calls the period from roughly the early 19th to the mid-20th centuries the era of “low hanging fruit.” According to Cowen, technological advances in this period were relatively easy to produce and exploit, resulting in a staggering explosion of living standards.
But by around 1970, most of this low hanging fruit had been plucked and growth rates began to slow. Indeed, growth rates are “lower today than before 1973, no matter what exact numbers you settle on for the absolute living standard.”

There are at least two reasons for this.

1. The age of cheap resources is ending. Many companies relied on cheap water, electricity, iron, etc for production. We've used up the easily accessible resources ("low hanging fruit") so what remains costs more to process and there is now global competition to use it as China and India industrialize and extend middle class comforts to billions of people.

2. The complexity of manufacturing keeps increasing. Compare the engine of a car from 1950 to today. Robots help with the assembly but there are more moving parts and of greater sophistication. Consider the clean room requirements and requirements of perfection on a small scale to create computer microchips.
Complexity makes it harder to create and produce new products.

There is an interesting flip side to the second point. This is the Information Age and while computer software also increases in complexity, well built software hides the complexity to produce "tools" that are easy to use and promote the creation of more information products. Anyone now can create publication ready books, art works, web services, etc on computers. So complexity enables information products and hinders physical products.

You may think, no problem, we'll just transition to an information society where the majority of workers are information workers. In the past the “creative destruction” of progress might end one industry like horse buggy making but resulted in an even bigger automotive industry. However software advances don't do that. Advances in software tend to decrease or eliminate jobs like travel agents. McDonald’s plans to eliminate cashiers in many of its European restaurants, replacing them with touch-screen ordering systems.

Internet companies can be worth more than old fashion manufacturing and reach hundreds of millions of customers and yet employ very few.

[Economist Tyler] Cowen notes that Google employs a mere 20,000; the increasingly ubiquitous Twitter only 300. Facebook has millions of users, but only about 1,700 workers.

For comparison, General Motors employs 209,000 people around the world.

Bottom Line

Again from Matt Patterson,

Unfortunately, politicians in the “low hanging fruit” period made policy decisions based on the assumption that the growth rates of that era — and their corresponding tax revenues — would continue indefinitely. And the American public, seeing successive generations do better than prior ones, came to expect this was the natural order of things. Both governments and individuals borrowed against a future they assumed would be richer and more technologically wondrous than the present.

Patterson observes from history that no civilization lasts forever.The ancient Greeks created the myth of the Cyclops to explain even more ancient fortresses with walls of giant stones that no one knew how to move. It must have been built by giants. In reality it was the Greeks own ancestors several hundred years before. "The Great Pyramid of Cheops was the largest building in the world until well into the modern era, and still stands after nearly five millennia". And yet a few centuries after its making, Egypt fell and the world forgot how to make them.

Bubbles result when people say, "This time it's different". But the Internet bubble burst, the housing bubble burst (many times) when expectations exceed reality. Have we been living in a technology bubble of 200 years?